Live

Watch CBSN Live

Twitter and Facebook Must Really Be Hungry for Revenue

It was just yesterday we heard that Twitter would push ads in news streams, even if the users didn't follow the accounts of those companies, as AllThingsD reported. Today, it's Facebook that will drop ads in news streams, according to The Next Web.

What happened? Did CEOs Dick Costolo and Mark Zuckerberg have a brainstorming lunch date? No, they just both happen to head companies in similar circumstances: in social media with big expectations, high valuations, hungry investors, and a driving need to make more revenue than they do.

Big expectations
There's no way to know from the outside how much either Twitter or Facebook actually makes. As one IPO after another has proven, you can never believe CEOs who claim to head profitable private businesses, especially when those companies want to go public.

But the valuations have been all too public. Twitter's the small fry, with recent investments setting a $7 billion valuation. Facebook has been in the $60 billion to $70 billion range.

Both have taken a slew of investor cash. According to CrunchBase, Facebook has received $2.3 billion; Twitter's at $760 million. The VCs and other heavyweight investors want their money, and then some.

Show us the money
To get that, these companies need big IPOs, where people are ready to trample each other for a shot at a share. But investors want more than a promise. Even if they can't get profits, they at least want rapidly growing revenue. According to one report, Facebook's 2010 revenue was about $2 billion.

Say that Facebook hits $5 billion this year. Early estimates this year gave Twitter a shot at $150 million. Double it. And now look at Google (GOOG): $29 billion in revenue last year and a roughly $172 billion market cap.

Google's market value is roughly six times annual revenue. For Facebook to hit that type of multiple, it would need sales of about $12 billion a year. Twitter would need $1.2 billion. Neither is remotely close.

Granted, there have been some incredibly high multiples in IPOs earlier this year, but investors had been hungry for anything tech. Twitter and Facebook may have to show a lot more goods. And, certainly, the venture capital bunch won't be willing to trust to the kindness of strangers on the Street.

We'll show you the ads
There has to be a pressure cooker environment for management. That may be why Twitter's founders all left the company, because they weren't crazy about advertising as a way of making money.

The two companies aren't alone. LinkedIn (LNKD) has started to use members' faces in ads, which caused a public backlash.

It's a basic problem when high business expectations of social networks meet the low payment expectations of users. Companies will push harder and further into areas that they might have avoided before, because they feel that they have no choice. But at what point will consumers get fed up and go elsewhere, like to Google+, where people and their information are still the product, but they don't notice it as much?

Related:

Image: morgueFile user shadetree, site standard license.
View CBS News In